Fuel Fears Temper Outlook For Airlines

An overriding theme in the latest round of airline quarterly earnings reports was the high price of jet fuel and its offsetting impact on otherwise effective cost-containment goals. Despite those concerns, an American Airlines attempt last month to raise the passenger fuel surcharge failed when only a few competing major carriers followed suit. AirTran Airways fared better, successfully pushing through a $3 price hike last month on one-way tickets designed to counterbalance persistently high fuel costs.

"The goal is to break even this year, but, ultimately, fuel will determine whether we make that goal," said Continental Airlines CEO and chairman Gordon Bethune.

UBS analyst Sam Buttrick recently increased his forecast for 2004 industry operating losses from $200 million to $575 million, "primarily as a result of higher first-quarter oil prices."

Since each penny increase in the price of fuel translates to hundreds of millions of dollars in additional costs for the airline industry, carriers oftentimes defend themselves by hedging their fuel purchases at lower prices.

Southwest Airlines, for example, is well positioned with favorable hedges covering 80 percent of 2004 fuel needs and 70 percent in 2005. Alaska, American and Delta also have some hedges in place, while America West, Continental, Northwest, United and US Airways have none.

Low-cost carriers AirTran, Frontier and JetBlue, meanwhile, have an advantage in operating newer, more fuel-efficient airplanes.

As far as passenger fuel surcharges, many travel managers prefer to see airlines simply raise fares to cover fuel costs rather than selectively applying fuel surcharges on certain routes and withholding them from other, more competitive routes.

Though AirTran confirmed its fare hike was intended to offset fuel costs, it chose to simply raise prices across the board rather than formalize a fuel surcharge.

The fare hike was matched by competitors, including dominant Atlanta rival Delta Air Lines, and provided further proof of low-cost carriers' ability to set price points.

"This represents AirTran's first successful across-the-board increase since last May," said J.P. Morgan Securities analyst Jamie Baker. "It also speaks to the desperation of network carriers that willingly lend a hand to their low-fare competitors in the face of rising fuel costs."